On-Demand Work and Income Inequality
By Jonathan Hall, Ph.D
Much of modern income inequality can be explained by the fact that workers have non-work obligations that make scheduling work difficult. Apps that coordinate work such as Uber, TaskRabbit, and Airbnb provide an opportunity to supplement a worker�s income on his or her own schedule and according to his or her preferences. The State of California should be mindful of creating a policy environment that encourages innovation in flexible work in order to reduce income inequality while increasing the taxable income base for California.
While the U.S. unemployment rate has returned to its natural level below 5%, the labor market still shows worrying signs of weakness. The labor force participation rate is low, meaning that many working-age Americans are neither working nor looking for work, and many millions of workers work part-time out of scheduling necessity rather than preference as their non-work obligations make a full-time job impossible to come by.
Many American workers are happy in traditional wage and salary roles, but many others express a preference for work that fits into their own idiosyncratic schedule and can be done according to their personal preferences.1 App-enabled labor market platforms are opening up opportunities for such work with little to no friction, work that can be done "on demand." Public policy makers should take note of the hockey-stick growth in independent work that is mediated by apps such as Uber (my employer), TaskRabbit, and Airbnb, as finding new low-hanging fruit in the market for work will reduce the inequality created by under-employment while increasing state tax revenues.
Labor market friction is a major cause of income inequality. Every worker is unique, and for some workers, non-work obligations make a 9 to 5 job difficult or impossible. Opportunities in alternative work schedules that happen to fit a worker’s preferences and responsibilities may be difficult to find in the land of wages and salaries, increasing search time and forcing workers to accept sub-optimal offers. Inequality of income is even a problem month to month for workers themselves. Recent research by the JP Morgan Chase Foundation has demonstrated that the incomes of wage and salary earners often varies dramatically from one month to the next, as bonuses might be paid one month, hours cut the next. Unemployment spells cause even more variance. A low-friction alternative like doing independent work through an app can serve many functions for the modern worker, from providing an easy way to "top up" income in months with low other-job earnings to a productive equivalent of unemployment insurance that allows a worker looking for a job to earn money at times when she’s not look for work or interviewing for a job.
Indeed, JP Morgan Chase Foundation researchers found that labor apps are often used to offset low income from other jobs on a monthly basis. Workers turn to apps whenever they want to supplement the income they earn from other sources. Supplemental, on-demand income allows workers to pay for school, to enjoy semi-retirement, and to cover unexpected expenses without having to resort to credit card debt or payday loans. This last point is particularly important given that the Federal Reserve Board estimates that nearly half of Americans are not equipped to cover a surprise $400 expense. It is the fact that workers can turn on their apps whenever and wherever they want, without signing up for a shift that might or might not be available, that explains much of the appeal of such apps. A traditional employer, even one with a streamlined interviewing process, will always have to close the door to additional workers when the marginal product of another worker fails to exceed the posted wage. Platforms operate on a fundamentally different model that allows anyone to work at any time in exchange for income determined by the market forces of supply and demand.
Given that a main draw of apps for workers is low friction at signing up and at deciding when and where to work, we should focus some time and effort on understanding what frictions past and present have made on-demand work difficult to come by. Complicated, expensive, and time-consuming licensing regimes are well understood in economics to reduce employment in the regulated sector and encourage longer hours to compensate workers for the fixed cost of licensing. It is for this reason, for example, that heavily regulated drivers in New York2 tend to drive "full time" while many drivers in the less-heavily-regulated San Francisco market find it worthwhile to sign up even if they will only demand work for a few hours a week on average; it is simply not worth it to jump through New York’s licensing hoops if you don’t intend to drive full-time. Any hyper-local licensing requirement for businesses or independent workers is likely to be a drag on the labor market if mobile workers have to confirm that they are licensed in any town they happen to do business in. Regulations across the gamut of work, from driving to interior design, should be crafted to be consistent across the state and easy to comply with in order to reduce unhelpful frictions so that as many people as possible find it worthwhile to jump the regulatory hurdle and work on demand.
Work on demand, whether app-intermediated or otherwise, has the potential to fill in the large gaps between how much Americans are working and how much they want to work. Traditional wage and salary jobs are fine for many people but woefully inadequate for others. Ultimately, workers should be able to choose the kind of work they can do, and right now the evidence suggests that a lot of workers would like to have more opportunities to do work on demand, according to their own schedules and preferences.
See, for instance my peer-reviewed work with Alan Krueger as well as a Princeton working paper by Alexander Mas and Amanda Pallais.
Jonathan V. Hall is a member of the Treasurer's Council of Economic Advisors and Head of Economic Research at Uber Technologies. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the treasurer, his office or the State of California.